Home Mortgage Interest Deduction Forever?

August 22, 2005

Andrew Chamberlain

Andrew Chamberlain

One of the toughest issues facing federal tax reformers is how to deal with the deduction for home mortgage interest. Economists almost uniformly deride it, but homeowners, builders, and their representatives in Congress uniformly embrace it.

What’s wrong with it? For one, interest payment deductions carved some $323 billion out of the federal tax base in 2000. Not only does it distort investment decisions toward housing at the expense of computers, education and other investments that may boost productivity more than homes, but it forces taxpayers to bear higher tax rates as a result.

The home mortgage deduction is an equally knotty problem, even for people who like to reduce taxes. Economists tear their hair at the exemption, arguing that it encourages over-investment in housing at the expense of capital investment. “Workers with a computer in front of them are $15,000 more productive than workers without them,” says Stephen Moore, president of the Free Enterprise Fund and a proponent of the flat tax. “You just don’t get those kinds of productivity improvements from investing in housing.”

Many argue that homes will remain affordable under a consumption tax because people will have more income to spend. “Canada doesn’t allow mortgage deductions and it has similar levels of home ownership,” says Edwards of Cato. But it is unlikely that either the Tax Panel or the President will venture into this dangerous territory.

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